Small scheme buyouts can be challenging as the number of insurers willing to quote at that end of the market is often limited meaning that pricing may not always be as competitive as for larger schemes. In this article we examine a case study for one such small scheme.

By 2019, the funding level had improved sufficiently to the point that the scheme could now afford a buyout without a contribution from the sponsor and the client was therefore advised that it was timely for a buyout project to commence. The scheme had assets of around £25m and 50 members with bespoke benefits for a number of members due to the historic development of the scheme’s benefit structure. The initial aim was to remove the investment, inflation and mortality risks associated with the scheme; this would be achieved through a buy-in. The secondary aim of winding up the scheme could then be achieved by converting the buy-in to a buyout.

The first stage of the project was to provide the Trustees with suitable training to ensure that they were comfortable with what a buyout entailed and the process that the scheme would need to go through. Working closely with the scheme’s legal advisers, an indicative project plan was produced which set out the steps to be completed.

As with any buyout, the initial focus-step is on the scheme’s data and the governing documentation – it is key to identify any potential issues as soon as possible in a buyout project as these are two areas where challenges can often arise. This is particularly important for smaller schemes, which can be viewed as less attractive than larger schemes by the insurers in the market.

There are two elements to the scheme’s data.

·      Firstly, it was important that all data held on the administration systems is accurate and reliable and, with regular monitoring and data quality assessments, this step could easily be achieved for the scheme.

·      Secondly, insurers require more data than a third-party administrator would typically hold. For this scheme, information on members’ spouses and dependants was not previously held; a communication exercise with the members to obtain any missing data was conducted.

Once the data and scheme documentation were in good order, the next step was to approach the market with a request for quotations. For smaller schemes such as this one, there are typically fewer insurers who are interested in quoting, however diligent and thorough preparation work conducted for the scheme ensured that it was attractive to insurers – i.e. there were no hidden surprises and a transaction was achievable relatively quickly.

In the end, very competitive quotes from two leading providers were obtained, with the final premium resulting in a saving of approximately 10% from the initial buyout cost estimate. With an excellent price achieved, working swiftly with the Trustees and their other advisers, the buy-in transaction was completed by Q1 2020.

With the initial buy-in phase complete, the scheme had transferred all of its risks to the insurer with the attractive premium leading to a small surplus remaining in the scheme. Over the next few months, the team worked closely with the insurer to validate the scheme data and ultimately handover the ongoing administration and payroll of the scheme. At the same time, working with the Trustees and sponsor, the remaining surplus assets were refunded to the employer.

Once everything was in order, the buy-in policy was converted to a buyout and the members of the scheme issued with individual policies from the insurer. All the liabilities of the scheme had now been discharged and the scheme could then be wound up.

The project had now been completed on time, within budget and with a positive outcome for all parties involved.

For any scheme looking to buyout in the near future, and particularly for smaller schemes, the main takeaway for trustees is that preparation is key. By ensuring that scheme data is accurate, governing documentation is up to date and there are no nasty hidden surprises, small schemes can achieve a successful buyout.